Monday, 25 August 2014

End of the line for the Institutional Shareholder Committee / Institutional Investor Committee

So that's it. The Institutional Investor Committee (IIC) has been wound up.

August 2014

Following the merger of the Investment Affairs division of the Association of British Insurers (ABI) and the Investment Management Association (IMA) on the 30 June 2014, the National Association of Pension Funds (NAPF) and the IMA have agreed to dissolve the Institutional Investor Committee.
Where there is a shared agenda, the IMA and the NAPF will continue to work together and advocate in the best interests of their members, in particular with respect to policy issues which impact institutional investors and their stewardship of investee companies.

The spur for this is principally the recent merger between the ABI's investment department and the IMA (a change that also seems to have played a part in Legal n General quitting the ABI). This left the IIC with just two members - the IMA and NAPF - and, as a friend in the business points out, a committee of two can just meet for coffee.

To be clear about what was just wound up, under the terms of reference agreed last year the IIC was focused on policy, and giving the trade bodies a collective voice on issues of common interest, rather than shareholder engagement. At that point the IIC stopping sharing same goals that the Institutional Shareholders Committee (ISC) had been set up to pursue. But given that last week's announcement is the end of the line in terms of organisational continuity, this seems like a good opportunity to look back on its history.

Set up at the instigation of the Bank of England under the Heath government, the original ISC was intended to do pretty much exactly what the Investor Forum has planned. The idea was to help co-ordinate and maximise the impact of the existing investor protection committees run by the investor trade bodies. The ISC was originally comprised of the NAPF plus the associations (then separate) representing unit trusts and investment trusts. The ABI's forerunner wasn't a member at launch, though it joined reasonably soon afterwards. The forerunner to the IMA didn't join until much later (I think the 1990s?).

The role of the ISC was to focus engagement (as we call it now) on under-performing companies. This is much closer to the role of the Investor Forum than I think people may realise. This is for the simple reason that 'corporate governance' didn't really exist - as topic of engagement - at the time. This was all about seeking to stimulate better economic performance through the shareholder-company relationship, rather than achieving policy or structural changes to embed shareholder interests.

It is also clear that the ISC fell short in this task. Even by the time the Wilson Committee reported in 1980 it was fairly obvious that there wasn't much life in the ISC, with a limited number of cases passed on to it and, of these, an even smaller number (7) the subject of actual action. I think it was pretty inactive by the 1980s.

In the 1980s and 1990s the ISC swung one way and then another. There was an attempt to reconstitute it along the lines originally envisaged, and a paid director general was appointed. The then chair also suggested that the ISC might even occasionally employ an external consultant to give shareholders an external resource to underpin proposals for change in strategy. But it appears this new approach wasn't popular in the industry and was quickly abandoned.

From then on, the ISC seems to have focused on policy (as in promoting investor interests) and lobbying. There is probably some interesting paperwork around from this era. I blogged previously about Roy Hattersley's comments about investor protection committee policy positions on employee share ownership and profit sharing. I also stumbled across an ISC policy paper where the important role played by employees in the success of company is made explicit, though this is largely just an echo of the previous wording of the then Companies Act:

7.1 The Companies Act 1985 states inter-alia that "the matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members".

7.2 The ISC considers it important that this onus placed on directors by the Companies Act should not be overlooked. Directors should appreciate the significance of the role played in a company's progress by its workforce and should always consider the interests of all those involved in working together to improve their company's performance.  

It's worth noting the changed terms of reference for the ISC. Whereas it had originally been focused on stimulating the performance of investee companies, it shifted to lobbying in support of common policy positions held by the trade bodies.

· consider whether there are any such matters on which member organisations should co-ordinate their activities or representations to UK Government and regulators; European institutions; and, any other relevant international legislative, regulatory or standard setting bodies; and
· make joint representations on occasion and by mutual agreement.

I first came across the ISC in early 2000s, when the investment management industry was pushing back against the recommendations of the Myners Review in respect of shareholder activism (there was even some discussion at this point of their being a legal requirement to intervene in failing investee companies). The compromise position was a revamped set of principles about the responsibilities of shareholders. It was intended that these could be written into mandate agreements in order that trustees could asset managers accountable for their implementation.

I did some trustee training at the TUC around this time focusing on the ISC principles, and I think a few schemes even included a reference to them in their statement of investment principles. But as an initiative it failed (or succeeded, if the intent of some parties was for nothing to change). I don't think anyone would seriously claim that the ISC principles had a noticeable impact on the relationship between companies and their shareholders. This is despite it being the industry's own response to an important element of a major public policy review addressing its effectiveness.

The ISC also came into the frame when there was pressure for asset manager transparency, specifically disclosure of shareholder voting records. Labour took a reserve power which would enable it to make such disclosure mandatory, with the intention of nudging asset managers into voluntary compliance. The ISC in turn put out a position paper on the issue which, through gritted teeth, said that public disclosure was "desirable" but that it should be up to the manager whether to disclose or not, and what to disclose (as in full record, or just votes against, or stats). If managers did not disclose they were supposed to explain why not.

At the risk of blowing my own trumpet, I think I know this issue better than most people in corp gov land. There was a small increase in the number of managers disclosing some voting data, but I can honestly say I only ever saw one statement on one non-disclosing asset manager's website explaining why they didn't make votes public. The large majority of asset managers neither complied nor explained. It was another initiative with the ISC imprint that had a negligible impact.

But what really damaged the ISC, in my opinion, was the financial crisis. Given the failure of banks, and the enormous losses suffered, it was surprising that the ISC didn't say anything publicly about what was going on. This was also pretty clear indicator of how far the ISC had shifted from an organisation intended to defend investor interests in failing companies. The ISC did put out a revised paper on the role of investors, largely at the instigation of the ABI I think. But even then there was horse trading between the trade body members. Certain proposals in the original draft - like making it easier to file shareholder resolutions and the annual election of directors - were knocked out. Given that the latter reform was introduced in any case by the FRC, it shows you that even at that point (just months after the bank recapitalisations) there was pressure not to go "too far". In the long run, the revised ISC principles became a code, and that in turn was taken over by the FRC to become the Stewardship Code.

In 2010 the ISC announced the formation of the Institutional Investor Council which was to both promote the Stewardship Code an facilitate shareholder engagement. This looked like a return to the ISC's historic mission. But in reality nothing much seems to have happened. Just over a year later the IIC was relaunched again, this time as the Institutional Investor Committee and minus both a member (the AIC) and any commitment to stewardship.

The Kay Review dealt the death blow to the ISC/IIC by promoting an investors forum, separate from the trade bodies, to facilitate shareholder engagement. That, of course, is now established. In response, the IIC's own terms of reference were later revised again to rule out any role in co-ordinating engagement activity, and instead to focus it on policy. And, to come full circle, the merger of the ABI investment department with the IMA then made that role superfluous too.

A few quick thoughts as someone who has watched the ISC/IIC as an interested, critical and outside observer. In my opinion, in the period in which I became aware of it, the ISC/IIC did not have a noticeable impact on actual shareholder engagement, and pulled its punches on policy related to it. I have occasionally asked colleagues if they ever came across the ISC/IIC as a body co-ordinating engagement and they have said no. On the policy side, I think the nature of the ISC/IIC (a collective of trade bodies) made it more likely to take small c conservative positions.

Of more relevance to current events, the history of the ISC suggests that it struggled to ever work as a co-ordinating body for engagement. And this was true even when it had backing of the Bank of England, and when institutional share ownership in the UK was both more concentrated and largely domestic in nature. From my reading of it, the ISC reoriented to focus on policy because that's largely what the industry wanted. In addition, the emergence of shareholder-friendly corporate governance reform proposals (e.g. independent non-execs, incentive pay to 'align interests') as objectives to be sought at investee companies as a substitute for direct intervention probably made a policy focus a reasonable/defensible alternative.

To me it looks like the Investor Forum is generally trying to achieve the same things as the ISC in its original version. On the plus side, shareholder engagement is more accepted as an element of the asset management business these days, and there are initiatives (Stewardship Code, UNPRI) that that prod managers to be more active. The Forum also has a greater distance from the trade bodies. On the other hand, institutional ownership is more fragmented (at least geographically), and the asset management is now a much bigger business and the people that run it know where the money really comes from. And, in defence of the trade bodies it is their members that determine how far they can go - as critical as I have been of the IMA on some policy issues in the past, I doubt many members are pushing for a more radical line.

I would also highlight that in the history of the ISC there are several occasions where there was quite a lot of rhetoric, but little happened (the ISC principles, framework on voting disclosure, first iteration of the IIC). Perhaps this was partly deliberate - promising action in order to avoid more direct political intervention, or perhaps it reflected that those involved couldn't move the industry as far as they expected to. Either way it's a bit of a recurring theme to keep in mind.

So the over-riding question, really, is how much you think the asset management industry has changed. If managers now believe being a responsible owner is both effective and conducive to being a successful business (or at least not in conflict with it) then it should be able to achieve more than the ISC. It not, then it isn't obvious why things should be significantly different this time.

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